An unpublished opinion from the Washington State Court of Appeals upheld the findings of the Board of Tax Appeals in a case related to the apportionment of income for the purposes of Washington’s business and occupation (B&O) tax by a law firm with offices in both Washington and Oregon. Since 2010, the method for apportioning gross income for services is based on where the customers received the benefit, which is still the method used as highlighted in this case. The opinion in this case clarifies when companies should consider benefits received.
In October 2014, the taxpayer, Betts Patterson & Mines, PS (BPM) applied for a tax refund for overpaid B&O tax of $651,374, which they calculated by apportioning their income to the billing addresses of insurance companies they had worked on behalf of. They argued this was correct because the legal departments were where their customers received the benefit of litigation and defense services provided by BPM. The DOR granted a partial refund of $51,668, but claimed the apportionment method used by BPM was unreasonable under the method approved in 2010, The decision was appealed by BPM to the DOR’s Administrative Review and Hearings Division and the Board of Tax Appeals, both of which agreed with the DOR.
In the appeal to the Court of Appeals, BPM asserted that clients received the benefits of their litigation and defense services through the legal departments of the insurance companies they represent while the DOR held the benefits were received at the location of the litigation. The DOR highlighted that BPM claims they provide Washington specific litigation services, the business activities the litigation is related to happened in Washington, and the effect of the litigation is in the state of Washington.
In the analysis, the Court considered two additional cases, ARUP Laboratories v. State and Lending Tree LLC v. Department of Revenue. In ARUP, a medical laboratory company analyzed specimens then sent results to medical practices that had requested them. The finding in ARUP held that the benefit of services was where the medical doctors were located and where the results were used. The Court in the current case found the effect and benefit of BPM’s litigation came when attorneys litigated in Washington on behalf of the insurance companies and at the disposition of cases, which is not reliant on when BPM alerts legal departments of those dispositions. Lending Tree has a similar holding, with the Court in that case finding that the benefits of the online loan services offered by Lending Tree were realized where the loan referrals were received and used. The Court of Appeals points out that the benefits were realized by BPM’s clients when Washington licensed attorneys represented them in Washington. Regardless of where the legal departments of the insurance companies are located, the benefit is received where the litigation happens. Since the billing addresses do not fully and accurately represent the locations of BPM’s services, the Court agreed with the DOR that BPM’s apportionment method was incorrect.
BPM additionally argued that it is unreasonable for them to track which jurisdiction the litigation happens in. The managing shareholder for BPM asserted that trying to track jurisdictions would be time consuming and resource intensive, especially since the venue may change based on various proceedings. However, the Court of Appeals found this argument was insufficient as the shareholder offered no specific information about the time and expense which would be required to overcome the previous summary judgment.
This case clarifies how receipt of benefits is considered in Washington for the apportionment rule and the importance of record keeping. Since the specific locations of hearings and litigation played a critical role in benefits, that’s where benefits were recognized. Taxpayers who engage in legal or similar services with multiple locations need to correctly apportion their income for B&O based on where clients benefit from services, regardless of where they pay for them. Additionally, the Court points to the need for specific information needed to overcome summary judgment, which is another thing taxpayers may be able to provide with more detailed record keeping. If BPM had been able to provide specific examples of how long it would take and the expenses related to reapportioning the income in question, they may have received a different outcome. (Unpublished Opinion filed 11/3/2025, Judge Mann, David, with Coburn, L. and Bowman, Bill concurring, Betts Patterson & Mines, PS v State of Washington Department of Revenue, Case Number 86756-3-1, Court of Appeals in the State of Washington Division One)